Beyond the budget
Guardian News Editor
Published: Jun 03, 2013
A lot is riding on growth of the Bahamian economy.
So far as its fiscal and economic affairs are concerned, The Bahamas’ biggest challenge is not the debt it has been piling on, but the need for robust growth, observed Edward Al-Hussainy, assistant vice president and analyst at the international rating agency Moody's.
In his budget communication to Parliament last Wednesday, Prime Minister Perry Christie said his administration will focus on tax reform whose overriding objectives are to secure an adequate revenue base in support of its medium-term fiscal consolidation targets, while promoting growth of the domestic economy.
The cornerstone of that reform plan is the introduction of a value added tax (VAT) on July 1, 2014 along with concurrent reductions in both import duties and excise taxes.
Christie also announced that both the deficit on recurrent account and the GFS deficit will be eradicated by 2015/2016.
Asked how this will be achieved, Minister of State for Finance Michael Halkitis said the implementation of VAT next year will lead to substantial revenue improvements.
The prime minister also said government debt will return to a level in the area of 50 percent of GDP by 2016/2017, as opposed to a level approaching 70 percent in the absence of a decisive action plan to redress the public finances.
Al-Hussainy noted that it is too soon to tell whether VAT will be successfully implemented in the targeted timeframe and whether it will meet projections.
“The key thing is growth,” he told Guardian National Review.
“The VAT is obviously great, but if you don’t have domestic demand, if people are not buying things, people are not consuming, then the revenue from VAT would not be substantial, so a lot is riding on growth picking up.”
Former Minister of State for Finance Zhivargo Laing made a similar observation.
“The Bahamas’ biggest problem is not debt,” Laing said. “That’s the easy political thing to hold on to, to spin and talk about.
“The Bahamas’ biggest challenge is growth, job-creating growth. As you search that communication document and the budget itself, see if you’re satisfied that there’s a genuine, concrete plan to support job-creating growth.”
He said he doubts the government will be successful in eradicating the GFS deficit in the timeframe it has projected.
“I don’t think anybody believes that’s going to happen,” Laing said.
“There is nothing to suggest how this is going to happen because you would have to have a combination of robust economic growth; you’d have to have significant revenue measures and then you would have to have some restraint in terms of expenditure growth for that to be possible, and in this budget that should start the process, there is no concrete proposal to even begin the move along those lines.”
The economy grew by 1.8 percent in real terms last year, in line with the 1.7 percent growth registered in 2011, but below the 2.5 percent rate projected in the 2012/2013 budget communication.
“That clearly has had significant negative implications for the government’s recurrent revenue collections, as was highlighted in the mid-year budget statement,” Christie said.
The International Monetary Fund (IMF) forecasts that the Bahamian economy will expand by 2.7 percent in real terms this year, followed by 2.5 percent next year.
Referring to the projected growth, Al-Hussainy said, “That’s still a little bit below what growth rates should be given the amount of foreign investment that’s coming in, but it’s still a very healthy number considering the weak recovery in the U.S. and what’s going on more broadly in the Caribbean.
“And so, that said, I think the government is laying the foundation for reversing some of the fiscal space that was lost, so bringing down the deficit and then eventually putting the brakes on the growth in debt, I think that would take a number of years to materialize.”
While the prime minister announced broad measures for economic stimulus, the budget communication was low on specifics regarding job creation.
He said the broad thrust of the government’s growth strategy includes diversifying the key tourism and financial services industries, as well as the overall economy, partly through the promotion of innovation in high value-added products.
“We also seek to foster linkages between sectors and to identify and remove impediments to growth, particularly in the business environment,” said Christie, adding that ministers responsible will speak more about this key strategy during the budget debate which starts in the House of Assembly this week.
On Wednesday, the government brought a resolution to Parliament to borrow another $465 million to cover its revenue shortfall. This will push the government’s borrowing since last July well past the billion-dollar mark.
Al-Hussainy pointed out that the government is running a substantial deficit and needs to borrow money to fill that gap.
Asked whether this level of borrowing was a concern, he said, “Not really, not yet.”
He said The Bahamas can still borrow cheaply “so that’s a big plus”.
“If you look around the world, there are many countries that are struggling to borrow at cheap rates, and The Bahamas is not in that position, so it’s not a worry,” Al-Hussainy said.
“That said, obviously the borrowing will add to the debt, and so debt will continue to grow and at some point that’s going to become more of an issue.
“Right now, we’re below 60 percent and I think it will take a number of bad years for us to get to a point where we start worrying about just the pure level of debt.”
The Moody’s analyst said he would not put too much stock into the 50 percent debt-to-GDP threshold.
“I don’t think that number is super important,” Al-Hussainy said.
“I think what’s important is that deficits start to come down and the rate at which debt is growing slows down and I think those things are definitely achievable.
“They might not happen this year, but I think if growth holds up then I think within the next couple of years that’s a possibility.”
Regarding the government’s projection to return government debt to a level in the area of 50 percent of GDP by 2016/2017, Laing said this could be achieved with “a lot of luck” and “some very tough decisions”.
Laing noted that borrowing is unsustainable over the long run.
“The big question is: what’s the long run? When does it become impossible to sustain that level of borrowing?...In thinking about this, The Bahamas has to consider what is likely to be its growth trajectory over the next three, five years and beyond, and in light of that trajectory, what would be our borrowing needs over those periods of time,” he said.
“If we cannot foresee the kind of economic robustness over the medium to long term that creates jobs, improves income and thereby significantly boosts government revenue, revenue to comfortably pay back our loans, then we are talking unsubstantiality; we’re talking about problems.”
The issue of government borrowing was a key concern of the Progressive Liberal Party while in opposition.
The Ingraham administration borrowed well over $1 billion in order for The Bahamas to sustain itself during the global financial crisis, Laing had said while a minister.
He noted in March 2012 that the government had borrowed $1.3 billion, in comparison to $800 million borrowed under the previous PLP-led government
The government projects that in 2013/2014, it will collect $1.5 billion.
The GFS deficit is projected at $443 million or 5.1 percent of GDP, as compared to the estimated outcome of 6.1 percent of GDP this year.
Christie said recurrent revenues in the coming fiscal year will be enhanced by the ongoing, projected modest growth of nominal GDP.
The prime minister also reiterated his “abiding optimism for the future”.
Christie outlined a number of tax initiatives like several new taxes for domestic and offshore banks.
"The timing is never just right to ask taxpayers to contribute more to the coffers of the government. Yet we cannot allow the government to retreat from its obligations to maintain public services," he said.
"There is a cost to providing services that must be adequately financed and there is a standard at which services must be delivered which correlates with what we are asking taxpayers to pay."
The government also intends to introduce a new schedule for business license fees and eliminate all special categories of rates, except for financial institutions and stand-alone retail gas stations.
Business people are already anticipating the impact.
“I got two calls last night from executives who run companies of which I’m involved,” said businessman Franklyn Wilson last Thursday.
“The common theme was this will mean that our business license fees are going to go up by a very significant margin. I’ve not had a chance to study it yet, but clearly, that’s an impact.
“Clearly, that’s an effort for the government to try to raise additional revenues within the confines of a shrinking tax base.”
Wilson said the new budget comes at a time when many business people are starting to feel better about the economy.
“Anyone in this town whose phone is not ringing more than it was six months ago or nine months ago, they have to check what’s happening,” he said.
“If you are in any business and you don’t get a feel that this economy is turning, I think you have to check your business model. There is no question about it.”
|Last Updated on Monday, 03 June 2013 16:14|